Quality stocks expected to rebound after underperformance

Several fund houses are noticing a potential comeback for quality stocks after four years of underperformance. Recently, they have started filing for funds that focus on quality-driven investments. Among these, the Tata BSE Quality Index Fund is currently open for investment until March 28. Other funds from Kotak, ICICI Prudential, Axis, and SBI AMCs are awaiting approval. Quality stocks, which are known for better financial health and earnings, have lagged behind cheaper value stocks in recent years. This is mainly due to high valuations and a market shift towards more affordable investments. Experts believe that the quality of these stocks may soon improve. Aashish Somaiyaa from WhiteOak Capital said that despite strong earnings, quality stocks have struggled because the market has favored other types. He believes that 2025 could be the year for quality stocks to shine again. The quality factor, which measures the strength of a company’s fundamentals, has started to recover. It was at the bottom of investment rankings in early 2024 but climbed to a better position by the end of the year. Institutional reports suggest that quality stocks are performing better in uncertain market conditions. Experts predict that these companies could thrive as the economy faces challenges, especially since they usually offer steady growth and are less reliant on outside funding. Investors often prefer quality stocks because they tend to have more predictable growth compared to other types. Businesses that fall under this category often come from resilient sectors like fast-moving consumer goods and information technology. Historical data shows that quality stocks have outperformed broader market indexes like the Nifty 50 over various time periods. While the quality investment strategy is becoming more popular among fund managers, it is still a small portion of overall style-based mutual fund investments in India. Experts suggest that while investing in these quality-focused funds can be beneficial, they should complement existing investments rather than serve as the initial choice in an equity portfolio.